Don’t Make These 5 Mistakes When You’re Seeking Funding for Your Startup

MoneyinLightBulb.jpg

The odds are already against you. Avoid these mistakes when you’re seeking financing and approaching investors or lenders.

By Joanna L. Krotz (Host, The Woman’s Playbook)

I don’t need to remind you about the gender gap in funding for women-owned firms. You’re living it.

One recent study by Fiona Murray, an entrepreneurship professor at MIT, revealed that companies pitched by men were “about 40 percent more likely to receive funding than those led by women.” More distressingly, according to Murray, pitches from attractive men were particularly favored while attractive women did worse than unattractive men and women.

For sure, women-founded firms gain a few more bites of the VC pie every year.  But it’s not a lot to chew on. VC funding for women climbed to 13 percent of deals in the first half of 2013 – a record, and up from the measly 4 percent  in 2004, according to PitchBook.

Total venture funding for the first half of 2013 was $11 billion, reports DowJones VentureSource. On the other side of the desk, women make up only about one of every 10 VC investing partners (11 percent).

No wonder women are not in the room when money deals go down.

The bottom line: Women must work harder to secure financing. More often than not, women start businesses that aren’t as attractive to VC funding because they’re slower to grow and harder to scale. Plus, women owners typically resist taking on debt, even when they can. That also acts as a brake on growth.

So if you’re looking for funding, it pays to get your part right, and to control as much of the process as you can.

First, Get Your Financial House in Order

Before beginning your search for financing, make sure you’ve handled the basics of due diligence. That means:

  • The business plan is impeccable and clear.
  • he financials are buttoned up.
  • Any required licenses, permits or certifications are current.
  • Outside contractor and any employee agreements are legal and tidy.

After that, here are the five most common mistakes women owners make when approaching investors or lenders.

1. The Business Model Doesn't Appear Scalable

Businesses that can grow fast by providing solutions to big, far-reaching needs or problems are the ones that attract VC money and infusions of capital in the way of loans and other investments.

In 2013, healthcare, financial services, IT and software were big investment winners. But even when women are in the tech sector, they tend to start service businesses, which are based on selling time not products.

Women owners also often focus on social services, retail and beauty and fashion. These kinds of businesses don’t usually grow fast. To persuade potential investors, an owner must demonstrate how the company can reach a size large enough to be worth the investment.

2. There's No Clear Exit Strategy

Similarly, women looking for financing don’t often consider how investors will get their payoff. Women may see the business as a long-term or lifestyle choice, but investors are interested in profits — big ones.

As the owner, you must craft a strategy that will get money out of the business and to your investors, whether by becoming publicly traded, partnering with a larger firm, being acquired, or via some other exit. Women often do not present a strong analysis of revenues and profitability. Don't forget that investors primarily keep score by return on investments.

3. Women Owners Focus on the Market, Not the Product

Lenders and investors are plenty savvy. They may not know your particular arena, but they've heard hundreds of pitches, evaluated scores of companies and are versed in trends and economic conditions. Investors want to get excited by a solution, not a problem.

Women often tend to expend a lot of effort persuading investors to see the market opportunity, rather than talking up the key benefits and attractions of the product or service they sell.

4. The Owner Thinks the Business is Worth More Than It Is

At early stages, women owners often put a value on the business that’s out of step with current revenues or sales prospects. That unrealistic valuation is likely to scare off investors and rounds of funding. Or, the unsupported high valuation makes women think shares in their businesses are also worth more than investors do.

So, the women balk at giving investors a higher percentage of ownership that would attract funding. Future projections don't really count when it comes to securing capital in the early stages. It's all about the cash flow and how much money is needed to make progress or break even.

There's also often a concern about squeezing the family. Like most entrepreneurs, women usually begin by investing their own cash and that of family or friends, and seek professional investors after that. So, let's say with $50,000 in revenues, an owner values the business at $6 million for investors so she can repay family after the capital infusion and still keep growing. But investors think the business is worth only $3 million or $4 million and don’t want to overpay. That creates a problem.

5. Owners Don't Do Their Homework

Looking for funding takes research and education. You'll need to spend some time aligning your funding requirements with the right investors and groups. You should know:

  • The firm’s primary areas of investment
  • What geographical areas they cover
  • How they identify prospects
  • What specialties the firm covers, if any, and by whom

Treat fundraising like a sales process, as if you’re pitching a client. You will need to send out e-mails, leave phone messages, and create bullet-point presentations that define your deal parameters. Just keep it all short and succinct.

Besides online research and networking to learn more about suitable investors, it's also smart to cast a wider net and look beyond women-owned business groups. Don't take the risk of insulating yourself. Instead, head for where the deals are done.

What other advice do you have for seeking funding?


About the guest blogger: Joanna L. Krotz hosts THE WOMAN’S PLAYBOOK, the Internet radio show that connects and informs women entrepreneurs. Each show features real-life challenges of women owners and practical advice from smart experts. Live on Talking Alternative Broadcasting, Thurs., 12 – 1 pm, Eastern, or via iTunes podcast. Because being equal doesn’t mean being the same.